Accrual Accounting Explained
There are two principal methods for businesses to keep track of their income and expenses: the cash method and the accrual accounting method. Generally, a smaller business will operate under the cash method, while larger businesses choose the accrual method. There are advantages and disadvantages to both, and we are here to help advise you on the best method for your particular situation.
The main difference in the two accounting systems is the timing of when sales and purchases are credited and debited into your accounts, affecting your daily and weekly balances. With the cash method, income and expenses are recorded when they happen. Income is not counted until money is actually received, and expenses are not counted until they are actually paid out. With the accrual method, transactions are counted when the order is made or the service occurs, regardless of whether or not money changed hands. And expenses are counted when you receive the good or services, not when you write the check to pay for them.
The accrual method provides a more accurate picture of a company’s current financial condition, but it is a bit more complex to implement. For example, when a company sells a couch to an individual using a credit card, cash and accrual methods view the transaction differently. In the cash method, the revenue is not recorded until it is actually received, which can be months or a year down the line. The accrual method records the transaction at the time of the sale because they know that the income is going to be coming and they are recording the sale of the couch (taking it out of inventory) at the moment of the sale.
Recording the income in accounts receivable employs the matching method of accounting and more accurately reflects the company’s financial situation for that time period. Rely on the staff at Randolph Accounting Resources to help your company set up financial accounting methods that best fit the needs of the company.